July 23, 2010

Taleb's Epistemocracy

That's what I'm talking about.

My dream is to have a true "epistemocracy"; that
is, a society robust against expert errors, forecasting errors and
hubris, one that can be resistant to the incompetence of politicians,
regulators, economists, central bankers, bank ers, policy wonks and
epidemiologists.Here are ten principles for a Black Swan-robust society.

What is fragile should break early while it's still small:
Nothing should ever become too big to fail. Evolution in economic life
helps those with the maximum amount of hidden risks become the biggest.

No socialisation of losses and privatisation of gains:
Whatever may need to be bailed out should be nationalised; whatever does
not need a bailout should be free, small and risk-bearing. We got
ourselves into the worst of capitalism and socialism. In France, in the
1980s, the Socialists took over the banks. In the US in the 2000s, the
banks took over the government. This is surreal.

People who drove a school bus blindfolded (and crashed it) should
never be given a new bus: The economics establishment lost its
legitimacy with the failure of the system in 2008. Find the smart people
whose hands are clean to get us out of this mess.

Don't let someone making an "incentive" bonus manage a nuclear
plant - or your financial risks: Odds are he would cut every corner
on safety to show "profits" from these savings while claiming to be
"conservative". Bonuses don't accommodate the hidden risks of blow-ups.
It is the asymmetry of the bonus system that got us here. No incentives
without disincentives.

Compensate complexity with simplicity: Complexity from
globalisation and highly networked economic life needs to be countered
by simplicity in financial products. Complex systems survive thanks to
slack and redundancy, not debt and optimisation.

Do not give children sticks of dynamite, even if they come with a
warning label: Complex financial products need to be banned
because nobody understands them, and few are rational enough to know it.
We need to protect citizens from themselves, from bankers selling them
"hedging" products, and from gullible regulators who listen to economic
theorists.

Only Ponzi schemes should depend on confidence: Governments
should never need to "restore confidence". Cascading rumours are a
product of complex systems. Governments cannot stop the rumours. We just
need to be able to shrug off rumours, to be robust to them. Do not give
an addict more drugs if he has withdrawal pains: Using leverage to cure
the problems of too much leverage is not homoeopathy, it's denial. The
debt crisis is not a temporary problem, it's a structural one. We need
rehab.

Citizens should not depend on financial assets as a repository of
value and rely on fallible "expert" advice for their retirement:
Economic life should be definancialised. We should learn not to use
markets as warehouses of value.

Make an omelette with the broken eggs: The crisis of 2008
was not a problem to fix with makeshift repairs. We will have to remake
the system before it does so itself. Let us move voluntarily into a
robust economy by helping what needs to be broken break on its own,
converting debt into equity, marginalising the economics and business
school establishments, banning leveraged buyouts, putting bankers where
they belong, clawing back the bonuses of those who got us here and
teaching people to navigate a world with fewer certainties. Then we will
see an economic life closer to our biological environment: smaller
firms and no leverage - a world in which entrepreneurs, not bankers,
take the risks, and in which companies are born and die every day
without making the news. -- Excerpted from the author's New
Statesman article, Beware those Black Swans.

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Taleb's Epistemocracy

That's what I'm talking about.

My dream is to have a true "epistemocracy"; that
is, a society robust against expert errors, forecasting errors and
hubris, one that can be resistant to the incompetence of politicians,
regulators, economists, central bankers, bank ers, policy wonks and
epidemiologists.Here are ten principles for a Black Swan-robust society.

What is fragile should break early while it's still small:
Nothing should ever become too big to fail. Evolution in economic life
helps those with the maximum amount of hidden risks become the biggest.

No socialisation of losses and privatisation of gains:
Whatever may need to be bailed out should be nationalised; whatever does
not need a bailout should be free, small and risk-bearing. We got
ourselves into the worst of capitalism and socialism. In France, in the
1980s, the Socialists took over the banks. In the US in the 2000s, the
banks took over the government. This is surreal.

People who drove a school bus blindfolded (and crashed it) should
never be given a new bus: The economics establishment lost its
legitimacy with the failure of the system in 2008. Find the smart people
whose hands are clean to get us out of this mess.

Don't let someone making an "incentive" bonus manage a nuclear
plant - or your financial risks: Odds are he would cut every corner
on safety to show "profits" from these savings while claiming to be
"conservative". Bonuses don't accommodate the hidden risks of blow-ups.
It is the asymmetry of the bonus system that got us here. No incentives
without disincentives.

Compensate complexity with simplicity: Complexity from
globalisation and highly networked economic life needs to be countered
by simplicity in financial products. Complex systems survive thanks to
slack and redundancy, not debt and optimisation.

Do not give children sticks of dynamite, even if they come with a
warning label: Complex financial products need to be banned
because nobody understands them, and few are rational enough to know it.
We need to protect citizens from themselves, from bankers selling them
"hedging" products, and from gullible regulators who listen to economic
theorists.

Only Ponzi schemes should depend on confidence: Governments
should never need to "restore confidence". Cascading rumours are a
product of complex systems. Governments cannot stop the rumours. We just
need to be able to shrug off rumours, to be robust to them. Do not give
an addict more drugs if he has withdrawal pains: Using leverage to cure
the problems of too much leverage is not homoeopathy, it's denial. The
debt crisis is not a temporary problem, it's a structural one. We need
rehab.

Citizens should not depend on financial assets as a repository of
value and rely on fallible "expert" advice for their retirement:
Economic life should be definancialised. We should learn not to use
markets as warehouses of value.

Make an omelette with the broken eggs: The crisis of 2008
was not a problem to fix with makeshift repairs. We will have to remake
the system before it does so itself. Let us move voluntarily into a
robust economy by helping what needs to be broken break on its own,
converting debt into equity, marginalising the economics and business
school establishments, banning leveraged buyouts, putting bankers where
they belong, clawing back the bonuses of those who got us here and
teaching people to navigate a world with fewer certainties. Then we will
see an economic life closer to our biological environment: smaller
firms and no leverage - a world in which entrepreneurs, not bankers,
take the risks, and in which companies are born and die every day
without making the news. -- Excerpted from the author's New
Statesman article, Beware those Black Swans.